Daily Development for Wednesday, March 27, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

RULE AGAINST PERPETUITIES; OPTIONS: An option to purchase property which is not limited by time and extends to the grantee's heirs and assigns violates the Rule against Perpetuities and is void.

Reynolds v. Gagen, 732 N.Y.S.2d 4 (A.D. 1 Dept. 2001).

Plaintiff and Defendant were joint purchasers on a contract of sale. At closing, Plaintiff could not produce his portion of the purchase price, but the parties agreed that Plaintiff could "buy in" and acquire a half interest in the property later by paying Defendant 50% of all monies Defendant had invested in the property. The agreement recited that, "this agreement shall be binding on both of us and our heirs and assigns," thus creating a purchase option exercisable by Plaintiff's heirs.

The court distinguished other cases in which it was clear from the context that the parties intended that the rights in question were exercisable only within the lifetime of the optionee. Here the language of the option quite clearly extended to heirs and assigns. The option was void under the common law Rule Against Perpetuties followed in New York.

Comment 1: It may be that the parties had in mind specific heirs or assigns who were then living. Had they named these persons, then everything would have been jake. These parties would have become "lives in being." If no one was named, however, then the contracting parties were the only lives in being that could be taken into account, and the rights created by the option violated the Rule. This would have been true even if there had been a specific period of time for the exercise of the option if that period was in excess of 21 years.

If the parties had no one in mind, then this would have been the classic case for use of the "Perpetuities Savings Clause," that limits the enforceability of the rights to a period determined by identifying a group of easily trackable lives in being and then adding 21 years. Because, by definition, any rights so delimited must vest or fail within the Rule's period, the Rule has no application. Commonly Republicans have used all now living descendants of John J. Rockefeller of New York, while Democracts have used all now living descendants of John J. Kennedy. It may be that we should be looking for new names ere long.

Comment 2: The Rule Against Perpetuities was originally created as a drag upon the ability of landed families to control the devolution of property interests by devise will into future generations. The measuring period established by the Rule - lives in being plus 21 years - obviously is intended to fit within the framework of interfamily wealth transmission. It is a valid criticism that such a measuring period has little meaning in the context of commercial transactions, and many have argued that the Rule should either be abolished or limited to donative transactions. Such arguments clearly have merit, but we should keep in mind that the law should provide a reasonable substitute, for creating contingent future rights that may or may not take hold at some remote future time, with no presently identifiable owner of such rights, clearly ties up society's ability to move real estate to its highest and best use through voluntary present day transactions, and "impedes alienability."

Comment 3: A dramatic application of the Rule in New York is Symphony Space, Inc. v. Pergola Properties, Inc., 646 N.Y.S.2d 641 (Ct.App. 1996) (the DIRT DD for 3/28/96), which invalidated an option interest worth millions and millions of dollars. That deal, like this one, could have been saved if the attornies involved had smoked out the issue and used a savings clause. Another Dirt DD involving application of the Rule to options is the one for 1/27/98.

For happier interpretations of the Rule in this context, see the DD's for

10/6/00, 4/2/99, 3/5/99 and 4/12/96.

All of these DD's can be found on the DIRT Website, www.umkc.edu/dirt

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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